Performing Vs Non -Performing

Loans
•The loans and advances are classified as Non
Performing Advances (NPA) based on the criteria set
out in Direction No. 3 of 2008 dated 8th May 2008,
issued by the Central Bank of Sri Lanka on
“Classification of Loans and Advances, Income
Recognition and Provisioning”.

•The Central Bank of Sri Lanka issued Banking Act,

Direction No. 9 of 2008 on 30th December 2008 on
“Amendments to Directions on Classification of Loans
Income Recognition and Provisioning”
 Categorisation of Non-performing lending portfolio

Type of facility Point of classification

Overdrafts Outstanding balance in excess of

sanctioned limit continuously
for a period of 90 days or more
Credit facilities repayable in monthly Three consecutive installments, principal
installments  and/or interest have not been paid
Credit facilities payable in quarterly/half An installment is not paid within 90 days
yearly from the due date
installments 
Credit facilities repayable in one Payment is not made within 90 days from
installment the end of the agreed period or the due
at the end of a specified period or on a date
due date
(bullet payments) 
Credit cards Minimum payment is in arrears for 90
days from the due date
 Classification of rescheduled credit
facilities
• When rescheduling occurs before a credit facility is classified as NPL, the
rescheduled credit facility shall be classified as non-performing when, in
aggregate, the period of time the credit facility was in arrears before
rescheduling and after rescheduling exceeds the time period specified for
NPA Advance.

• In the case of capitalisation of accrued and unpaid interest, banks shall

classify a credit facility created by way of capitalisation of accrued and
unpaid interest as NPL
 Classification of multiple credit
facilities granted to a single borrower
• Banks shall classify all credit facilities extended to a borrower as
NPL, when one or more credit facilities has/have been classified
as NPL in terms of Direction and if the aggregate amount
outstanding of such NPL exceeds 30% of the total credit facilities
extended to such borrower. Banks are required to comply with
this Direction commencing January 1, 2009.

No. 9 of 2008 on 30th December 2008 - commencing 01 January 2010

 NPA Categories
Type of Determinant Overd Sub Doubtful Loss
facility ue standard
Overdrafts Period that the outstanding is 90- 180-360 360-540 More
in excess of the sanctioned limit 180 than
continuously 540
Credit Principle or interest Due or un 3-6 6-12 12-18 More
facilities paid than
repayable 18
in monthly
installment
s
Credit cards No of days minimum payment is 90- 120-180 180-240 More
in arrears for from due dates 120 than
240
Other No of days payment s are in 90- 180-360 360-540 More
credit arrears from due date 180 than
facilities 540
 Re-classification of NPL as PLA
• Banks shall reclassify NPL as PLA, if interest and principal in arrears are paid by the
borrower in relation to classified NPLs.
No. 9 of 2008 on 30th December 2008 -

Facility Type Criteria to reclassify NPL as PLA

Special mention category When 60% in excess of the sanctioned limit
is paid by the borrower.
Sub-standard category 70%
Doubtful category 80%
Loss category 90%
Overdraft facilities where the anctioned Reclassification does not arise
limit has expired or cancelled or no
limit has been availed
Credit facilities repayable in monthly When the installments, principal and/or
installments interest, unpaid are less than
three.
All other credit facilities If interest and principal in arrears are paid
by the borrower.
 Re-classification of rescheduled NPL as PLA
Rescheduled NPL in Upgrade to the PLA
Special mention Period of 90 days after the date when
Category (Over due) first payment of interest or of principal,
whichever is earlier, falls due under the
rescheduled terms.
Sub-standard and Period of 180 days after the date when
Doubtful categories first payment of interest or of principal,
whichever is earlier, falls due under the
rescheduled terms.
Loss category Period of 360 days after the date when
first payment of interest or of principal,
whichever is earlier, falls due under the
rescheduled terms.

The amount of specific provision made earlier, in respective of rescheduled NPL

of above categories, could also be reversed after the period specified above.
 Granting of new credit facilities
• Banks shall not grant new credit facilities for
repayment of NPL in the name of the same
borrower or any party, unless the credit
facility so created is also classified as NPL and
categorised into the same category of the
repaid NPL
 Income recognition
Do you know how to Account ???
• Performing - Income statement
• Non Performing -???

Banks shall recognise interest on an account which has been classified as

NPL as income, as and when the interest is collected by the bank, if it is
collectedon a cash basis.
At the time of classifying the credit facilities as NPL, bank shall reverse the
accrued interest and credit the same to Interest in Suspense Account. The
reversal of unearned income identified after the close of a financial year
could be accounted for in the financial year in which the advances were
identified as NPL.
 Specific Provisions
Categories of Non-performing Minimum Specific
Credit Facilities Provisioning Requirement
Substandard
Credit card 25%
Others 20%
Doubtful 50%
Loss 100%

General Provisions
5th December 2006, in terms of Section 46 of the Banking Act No 30 of 1988, as
amended, in "Requirements to Maintain a General Provision for Advances" requires
all licensed commercial banks to maintain a general provision of 1% of the total on
balance sheet performing loans and advances and on balance sheet overdue loans
and advances, net of interest in suspense and credit facilities secured by cash
deposits, gold or Government securities with the same bank. The general
provision was commenced with a minimum of 0.1% provision as at 31st December
2006 and thereafter incremental provisions are being made on the same basis till
31st March 2009.
 Valuation of security for provisioning
purposes
• Primary Mortgage over Immovable Property
• Mortgages other than Primary Mortgages
Mortgages other than primary mortgages over immovable property will
qualify for the above purpose subject to complying with the conditions in
Direction 7(1)(I) above and if such property is mortgaged to the same
bank.

• Assignment over Life Insurance Policies -90 per

cent of the surrender value
 Valuation of security for provisioning
purposes (continue..d)
• Secured on Gold
• Assignment of Shares
– Quoted- 90% Latest MV
– Unquoted - 75 percent of the net tangible asset
value per share
• Mortgage over Plant, Machinery and
Equipment
• Mortgage over Motor Vehicles
 Valuation of security for provisioning
purposes (continue..d)
• Pledge over Stocks/Goods under the Bank’s
Control -50% MV
• Hypothecation of Stock-in-Trade -30 per cent of the
current value of stocks provided that the level of stock-in-trade is closely
monitored by the bank.
• Government Guarantee –Full Value

• Guarantees- Licensed Banks – incorporated locally or outside Sri Lanka

Bank’s credit rating Value of security
AAA to AA- or equivalent 80%
A+ to A- or equivalent 50%